Stocks, Bonds And Oil All Seeing Weakness

Key Takeaways

• Five Month Win Streak For Stocks In Jeopardy
• Oil Prices Falling
• Bond Pullback Making Mortgages More Expensive

It’s been a rough week for most asset classes heading into Friday. For the week, the S&P 500 is off 2%, including losses of 0.8% on Thursday. The Nasdaq Composite is down 2.5% this week after falling over 1% on Thursday and is down over 7% for the month. With just a couple weeks left in August, what has been a five-month win streak for equities is in danger of being snapped.

The weakness we’re seeing of late isn’t just tied to equities. Bonds, gold, and silver are also showing signs of weakness in what has simply been a broad asset class pullback. The pullback in bonds has sent yields to levels not seen since 2007. That has subsequently sent mortgage rates above 7% with many analysts expecting rates to reach as high as 8%. That’s quite remarkable when you consider where rates were just a year and a half ago. At the same time, 8% for a mortgage is very much in line with historical averages; however, the velocity of the move higher has been dramatic.

Related to higher rates is a slowdown on housing sales. Next week we’ll get the full month report on existing home sales, but a report out of REMAX suggests existing home sales are falling. Many homeowners do not want to have to take out a mortgage at higher rates and that’s keeping them put in their current home. As a result, the supply of homes on the market is shrinking. There is a lot of talk about real estate prices remaining stable, but I think the reason for that is the lack of supply more so than price appreciation.

Another asset showing weakness of late it oil. I’ve spoken about oil and its recent rise. There is ample reason to worry about rising prices there because of how sensitive inflation is to oil. But in the last week, oil is down 7%, which may relieve some of the concerns over inflation which were stoked a bit Thursday when initial jobless claims came in slightly weaker than expected. The “big tuna” monthly employment report is due out in a couple weeks and I’ll be interested to see not just the numbers, but how the market responds.

Looking at some individual stocks this morning, shares of Applied Materials
AMAT
are up slightly in premarket trading. The chipmaker reported earnings premarket and guided analyst expectations higher for next quarter. Shares of John Deere are down around 2% premarket. Despite beating on expectations, the main catalyst wasn’t increased unit sales as much as it was simply higher prices. Shares of Tesla
TSLA
are indicated down over 2%. Yesterday, Tesla announced they will be cutting prices in China on their Model X and Model S by about $10,000. The moves comes shortly after a cut in lower end models earlier this week, which came after a pledge by Elon Musk that he wouldn’t cut prices in China.

Finally, today is expiration Friday and it is set to be a fairly large notional expiration. Any expiration Friday can bring an added amount of volatility, especially around the open and close. Therefore, I will be keeping an eye out for any unexpected moves. With the VIX just under 19, overall volatility is very much in line with historical averages. Having said that, VIX was below 15 last week and has steadily crept higher this week. That could a sign investors are a bit concerned about the current pullback as summer winds down. As always, I would stick with your investing plan and long term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.